Individuals, companies or other organizations can invest in real estate in England and Wales through almost any type of vehicle. This includes investment through UK or non-UK companies, partnerships, unit trusts and pension schemes as well as direct investment by individuals.
However, the choice of structure and choice of vehicle will have significant tax and other consequences. It is also possible to invest in property collectively, for example through a property investment fund or a real estate investment trust (REIT).
Last modified 13 Mar 2025
The following indirect taxes may apply to the purchase of real estate through each type of corporate vehicle:
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VAT does not automatically apply to the purchase of land, although in a few cases (such as newly built commercial properties) the seller must charge the standard rate of VAT (which is 20%). In the case of commercial property transactions, the seller will often choose to charge VAT since this may enable the seller to recover any VAT it has paid on goods or services relating to the property. For investment properties which constitute letting businesses, the transaction may be treated as the “transfer of a going concern” which does not attract VAT, although a number of conditions need to be met for this to apply.
The purchase of residential properties or certain properties for charitable use may either be exempt or subject to VAT at the zero rate.
However, where VAT is incurred, it is often possible for the person incurring the VAT charge (in this case, the purchaser) to recover that VAT cost from the UK tax authorities. Broadly, a person can recover VAT costs incurred if they have incurred the VAT in the course of a business and the business activity involves charging VAT on goods or services supplied to others.
Where property in England or Wales is purchased with the intention of letting the property, VAT costs incurred are likely to be recoverable provided that the purchaser charges VAT on all rental income that it receives. In order to ensure that VAT is chargeable on rent (and hence that VAT incurred is recoverable), the purchaser must register for VAT in the UK and choose to charge VAT by making an “option to tax” in relation to the property.
VAT can be recovered by means of a, usually quarterly, VAT return to the UK tax authorities. Recoverable VAT costs incurred can be offset against VAT that the relevant person is required to pay to the UK tax authorities. A refund can be claimed if the former exceeds the latter.
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Other costs include the fees of professional advisors (eg surveyors, lawyers, accountants, capital allowances consultants).
Where the buyer acquires an interest in the real estate it is usual, and usually a condition of any third party financing, for certain searches and due diligence to be undertaken, for example:
Also, where real estate is acquired, this must be registered with the Land Registry and relatively small fees apply depending on the value of the property interest acquired.
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The tax position will depend upon the type of entity that holds the English or Welsh real estate and whether the real estate is held as an investment or for the purposes of a trade. The following can be noted in relation to certain types of vehicles holding UK real estate as an investment.
If the property is held in a limited partnership, a limited liability partnership or a “bare” trust (that is a trust in its simplest form), the entity will normally be treated as transparent for UK tax purposes and so the partners or members or beneficiaries of the trust (as applicable) will be directly subject to UK tax on income arising from the property. A non-UK unit trust is normally structured so that income is treated as accruing directly to the unit holders and not to the trustees of the unit trust in which event the unit holders will also be taxed directly on any income arising.
Different taxes will apply depending on the circumstances of the individual partners, members, beneficiaries or units holders (as the case may be); for example relevant circumstances include:
Non-UK tax resident companies are subject to UK corporation tax on profits and gains made from the ownership of UK real estate in the same way as UK companies (see below).
If the property is held by a UK tax resident company, the company will be subject to UK corporation tax on any income or gains from the property at a current rate of 25%, (a lower rate applies to companies with profits of less than GBP250,000).
Generally, a tax deduction can be claimed for any costs or expenses that are “wholly and exclusively” incurred in connection with a UK property letting business. Subject to UK transfer pricing rules and other anti-avoidance principles, deductions may be available for interest costs on borrowings to fund the purchase of property in England and Wales.
To reduce or offset taxable income, any person liable to UK tax on the ownership of real estate in England or Wales may also be able to claim a depreciation allowance or capital investment relief on certain types of building and on certain types of plant and machinery which are installed within buildings. In the UK, this is known as a “capital allowance”. Depending on the type of expenditure incurred and on the taxpayer, capital allowances may either allow depreciation to be claimed via an annual writing-down allowance of a certain percentage of the cost of a capital item. or for relief to be claimed on the full cost of an item in the year of acquisition (colloquially known as ‘full expensing’).
Capital allowances rules are complex, but the following general comments should be noted:
Among the conditions for these higher rates of allowances are that the plant and machinery must be unused and not second-hand and must not be provided for leasing. Plant and machinery in let real estate may therefore be excluded from these higher allowances unless it qualifies as ‘background plant or machinery’.
Additionally, for both incorporated and unincorporated taxpayers, an annual investment allowance is available for the first GBP1 million of expenditure on plant and machinery which allows an immediate deduction of 100% of the cost of the item in the year in which the expenditure is incurred.
The value of land cannot be depreciated for tax purposes.
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The owner and/or occupier of real estate in England or Wales is liable to pay either business rates or council tax, as well as rates for the supply of water. The amounts payable depend on the property's location.
Last modified 13 Mar 2025
Income is predominantly from rentals. Profits from developing or trading land can also be taxed as income (as opposed to capital gains).
Last modified 13 Mar 2025
All entities or persons receiving income from UK property will be subject to UK tax and will generally be required to file a UK tax return.
The tax position will depend upon the type of entity that holds the English or Welsh real estate and whether the real estate is held as an investment or for the purposes of a trade. The following can be noted in relation to certain types of vehicles holding UK real estate as an investment.
If the property is held in a limited partnership, a limited liability partnership or a “bare” trust (that is a trust in its simplest form), the entity will generally be treated as transparent for UK tax purposes and so the partners or members or beneficiaries of the trust (as applicable) will be directly subject to UK tax on income arising from the property. A non-UK unit trust is normally structured so that income is treated as accruing directly to the unit holders and not to the trustees of the unit trust in which event the unit holders will also be taxed directly on any income arising. Different taxes will apply depending on the circumstances of the individual partners, members, beneficiaries or units holders (as the case may be); for example relevant circumstances include:
Since 6 April 2020, non-UK tax resident companies have been subject to UK corporation tax on rental profits made from the ownership of UK real estate. From that date non-UK companies are taxable on rental income in the same way as UK companies (see below).
If the property is held by a UK tax resident company the company will be subject to UK corporation tax on any income or gains from the property at a rate of 25%. A lower rate applies to companies with profits of less than GBP250,000.
Generally, a tax deduction can be claimed for any costs or expenses that are “wholly and exclusively” incurred in connection with a UK property letting business. Subject to UK transfer pricing rules and other anti-avoidance principles, deductions may be available for interest costs on borrowings to fund the purchase of property in England and Wales.
Where the benefit of any rental income (from a property in England or Wales) is paid to or attributed to a non-UK person, then the income may be required to be paid after a 20% withholding of tax under the UK's “non-resident landlord scheme”. However, the requirement for a withholding of tax may be avoided if the person or persons entitled to the income make an application to the UK tax authorities for the right to receive gross rents.
If this application is successful, then rental income will be received without any tax withholding but the persons receiving the rent will be required to file UK tax returns and account for tax at the appropriate rate. If a 20% withholding is incurred then credit for that tax will be obtained when subsequently filing any UK tax return in relation to the same income.
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Limited partnerships and limited liability partnerships are generally treated as tax transparent and so partners are taxed directly on any income from the partnership in proportion to the income sharing ratio set out in the partnership agreement. No further UK tax is payable on the distribution of profits from the partnership to the partners.
A “bare” trust (that is the simplest form of trust) is treated as tax transparent and so any beneficiaries are taxed directly on any income to which they are entitled. No further UK tax is payable on the distribution of income to the beneficiaries.
If a non-UK unit trust is structured in an appropriate way, the income will accrue directly to the unit holders and they will be taxed directly. No further UK tax is payable on the distribution of income from the trustees of the unit trust to the unitholders.
Distributions by a UK company to its shareholders are not subject to withholding tax in the UK. If a shareholder has funded the company by way of debt, interest payable to it may be subject to UK withholding tax at a rate of 20%, although this may be reduced if a relevant double-tax treaty or other exception applies. Shareholders may be taxed on the receipt of distributions and interest depending on their tax residence and status.
There is a generous UK tax exemption for UK companies receiving dividends and UK resident individuals are usually entitled to a tax-free allowance for dividend income of GBP500 with dividend income in excess of that allowance being taxed at various rates depending on a taxpayer’s circumstances, the highest rate being 39.35%.
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The fees of agents, and legal and other professional advisors are payable in connection with the ongoing management of the property.
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Limited partnerships and limited liability partnerships are generally treated as transparent for UK tax purposes meaning that any gains from the sale of property will accrue directly to the partners.
Non-UK residents are, subject to some exceptions, subject to UK tax on any capital gain made on the sale of UK commercial or residential property or the sale of a company (or other form of legal entity) that, broadly, derives 75% or more of its gross asset value from UK commercial or residential property.
Note that profits arising from the sale of property in the course of development or trading transactions can be taxed as income rather than capital gains.
As a “bare” trust (that is to say the simplest form of trust) is treated as transparent for UK tax purposes, any gains from the sale of property will be taxable directly against the beneficiary.
As with limited partnerships and limited liability partnerships, profits arising from the sale of property in the course of development or trading transactions can be taxed as income rather than capital gains and therefore may be subject to tax in the UK.
A UK resident company and a non-UK resident company that is subject to tax on capital gains realised from the sale of UK land are subject to corporation tax at the rate of 25%.
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Most property is sold through estate or other property agents, who charge commission for their services, normally conditional upon the completion of the sale. The seller pays the agents’ or brokers’ commission. The English system does not use notaries and all legal work is carried out by solicitors, whose rates vary depending on the complexity of the transaction. Sellers pay their own legal fees.
If the property is subject to a mortgage/charge, the seller may have to pay early redemption charges and associated documentation fees to remove the mortgage/charge over the property upon completion.
If the property is leasehold, the seller may have to pay fees to the freehold owner (namely the superior landlord) to gain consent to the sale.
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How can investment in real estate by an individual/organization/company be set up?
Individuals, companies or other organizations can invest in real estate in England and Wales through almost any type of vehicle. This includes investment through UK or non-UK companies, partnerships, unit trusts and pension schemes as well as direct investment by individuals.
However, the choice of structure and choice of vehicle will have significant tax and other consequences. It is also possible to invest in property collectively, for example through a property investment fund or a real estate investment trust (REIT).
Last modified 13 Mar 2025